Steve B from Tulsa, OK. OG&E territory. Completed an audit for a hotel chain with 6 locations. Found rate classification errors on 3 locations and a demand billing error on 1. My report shows total annual savings of $34,200 which means my fee at 45% is $15,390. The client CFO reviewed my report and says the savings are only $22,000 because she calculated differently. She used the bills from the last 12 months and compared old rate vs new rate. I used the tariff rate differential and applied it to the average usage over 3 years. Our methods produce different numbers. Who is right?
Client disputing my fee calculation — says savings are less than I claimed
Steve, this is a common dispute. Both methods have merit but they answer different questions. The CFO 12-month comparison shows what the actual savings were in the most recent year. Your 3-year average shows what the expected annual savings are normalized for usage variation. For fee calculation purposes, you need to specify in your engagement agreement which method is used. What does your agreement say?
Randy, my agreement says the fee is based on identified savings. It does not define how savings are calculated. That is the problem — the ambiguity is creating the dispute.
Steve, in the absence of a defined calculation method, the industry standard is to use the refund amount (which is a fixed number from the utility) for the retrospective component and the first 12 months of go-forward savings for the prospective component. The go-forward savings should be calculated using the rate differential applied to the most recent 12 months of actual usage, which is essentially what the CFO did. She may be closer to the right number for fee purposes.
Mike, if I use the CFO method my fee drops from $15,390 to $9,900. That is a $5,490 difference. It hurts but I also recognize that my 3-year average was not the right basis if recent usage was lower.
Steve, before you concede, check whether the lower recent usage was temporary. If the hotel had a renovation year with reduced occupancy that depressed utility costs, the 12-month number understates normal savings. In that case your 3-year average might be more representative of what the client will actually save going forward.
Terry, actually one of the hotels did have a partial renovation last year — closed one wing for 4 months. That reduced usage by about 20% at that location. If I use the CFO method but normalize the renovated hotel to full occupancy, the savings calculation comes to $29,400 which is between her number and mine. Fee at 45% would be $13,230.
Presented the normalized calculation to the CFO. Explained the renovation impact. She agreed that the renovated hotel should be normalized. We settled on $29,400 in annual savings and a fee of $13,230. Both sides compromised. Not exactly what I wanted but a fair outcome.
Lesson learned: my new engagement agreement defines exactly how savings are calculated. Refund savings are the actual dollar amount refunded by the utility. Go-forward savings are calculated using the tariff rate differential applied to the most recent 12 months of actual usage, normalized for any unusual operating conditions. No more ambiguity.